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ING Vysya: Grappling with losses

Jan 27, 2005

Performance Summary
ING Vysya Bank has reported a lackluster performance for the fourth consecutive quarter i.e. 3QFY05. For 3QFY05, while the bank has reported a marginal rise in the topline, bottomline has dipped by 73% on a YoY basis. Though the bank has been able to reduce its interest expenses continually and improving its net interest income as well as margins, the slow growth in topline as well as a strong fall in other income has taken a toll on the bottomline performance during the December quarter.

Rs (m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Income from operations 2,324 2,425 4.3% 6,873 7,244 5.4%
Other Income 714 473 -33.8% 2,695 541 -79.9%
Interest Expense 1,704 1,511 -11.3% 5,061 4,572 -9.7%
Net Interest Income 620 914 47.4% 1,812 2,672 47.5%
Other Expense 882 941 6.7% 2,479 2,659 7.3%
Operating profit / (loss) (262) (27) -89.7% (667) 13 -101.9%
Operating profit margin (%) -11.3% -1.1% -9.7% 0.2%
Provisions and contingencies 149 341 128.9% 909 1,270 39.7%
Profit before tax 303 105 -65.3% 1,119 (716) -164.0%
Tax 65 41 -36.9% 295 (288) -197.6%
Profit after tax/ (loss) 238 64 -73.1% 824 (428) -151.9%
Net profit margin (%) 10.2% 2.6% 12.0% -5.9%
No. of shares (m) 22.7 22.7 22.7 22.7
Diluted earnings per share (Rs)* 41.9 11.3 48.4 (25.1)
P/E (x) -
*(annulised)

South based private bank
ING Vysya Bank is one of the oldest private sector banks in the country, in which the ING group of the Netherlands has taken up a 44% stake. Though the bank has a large regional exposure in the southern part of the country, it is slowly expanding its presence in other regions. ING's participation in the bank's management has brought about a turnaround of sorts in the functioning of the bank. However, off late the bank has exhibited a very poor operational performance and seems to be doing little to correct this.

What drove performance in 3QFY05?
Marginal growth in topline: The topline performance of the bank continues to disappoint and is the lowest as compared to most of its peers in the sector. The yield on loans (8.9% compared to 9.9% last year) is witnessing a decline and this has further taken a toll on the topline. The bank has witnessed a 47% growth in advances and 17% growth in deposits on a YoY basis. The retail lending market (54% growth YoY) has been the main driver for the advances growth, while the corporate segment is still lagging with a growth of 37% YoY. However, the bank, like most of its peers, has succeeded in lowering its cost of deposits significantly, which in turn, has boosted the NIM growth.

Other income blues: There has been a strong fall in the bank's other income in the December quarter. While details are not clear, we believe that this may have been mainly due to a fall in profits from sale of investments. We had mentioned this as a cause of concern in our earlier results analysis. A high reliance of other income on treasury gains indicates lack of quality in the profitability of the bank.

Improvement in asset quality: The bank, in order to reduce its NPAs, has been aggressively provisioning in the last few years, a trend which has continued in the current fiscal. Provisioning in the December quarter has significantly amplified (129% YoY), which to an extent, is responsible for puncturing the bottomline growth in the third quarter. Though the bank has reduced its net NPAs to advances ratio (currently 2.7% compared to 3.6% in 3QFY04), it still continues to be one of the highest among private sector banks.

What to expect?
At the current price of Rs 566 the stock is trading at 1.8x its 3QFY05 book value. Post the impending rights issue (record date not yet declared), the price to book value ratio is likely to get adjusted to 1.5x and the stock is expected to trade at Rs 140 levels. Although the fresh capital infusion will augment the bank’s networth by 39% and improve its capital adequacy ratio (at present 10%), the possibility of the bank sustaining its earlier ROE levels remains questionable. Despite the restructuring initiative that was carried out by the parent group, consistency in performance does not seem to be setting in. As mentioned in our view on the rights issue, the offer price of Rs 45 is definitely a windfall offer for the existing shareholders (the same being at a substantial discount to the post issue expected market price), but considering the bank’s below average performance, we recommend investors to exercise caution in this regard.

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